Country Focus:Bulgaria - Eurogiro payments April 06.doc.pdf · Country Focus:Bulgaria April 2006. ... some way to achieving this objective. ... Under the terms of the contract,

STP: far from straight forward

Corporates: are you being served?

After 2010: future refocus

Country Focus: Bulgaria

April 2006

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The final approval of the cardsframework last month hopefullysignals that significant movement

towards implementing SEPA is at long lastunderway.With nearly all the necessaryregulation in place, it seems that the springmonths will finally bring the implementationand deployment stages to the Eurozone.

Henrik Parl from Eurogiro discusses whathe thinks will be the next key trend in theindustry after the 2008 deadline (see page 9).

SEPA is not the only pressing concern forbanks at the moment,Tim Decker from JPMorgan explains why non-STP charging for euro payments is also a serious issue in need ofresolution (see page 4).

On a lighter note,April also entails a slew of practical jokes that springup on the first of the month. In keeping with the industry focus on theEurozone, I thought I’d highlight a particularly apt April fool of yesteryear.

In 1999, the Today program on BBC Radio 4 announced that the Britishnational anthem was to be replaced by a euro anthem sung in German.Thenew anthem, which Today played for their listeners, used extracts fromBeethoven’s music and was sung by pupils of a German school in London.Reportedly, Prince Charles’ office telephoned Radio 4 to ask them for acopy of the new anthem. St James’ Palace later insisted that it had beenplaying along with the prank and had never been taken in by it.

Regards,Virginie

Alain BesnardHead of Global ClearingServicesBanks & Financial InstitutionsSociété Générale

Olivier BrissaudGeneral Manager,Coordination CentreVolkswagen, Belgium andPresident of the IGTA

Maurice CleavesEuro Product Head and EMEAMarket Management atJPMorgan Treasury Services,JPMorgan

Julian HargoodCommunication ManagerCLS Group

John KerrHead of International BusinessWestpac, Sydney

Whitman E KnappPresidentFImetrix LLC

Anna Koritz Head of International CashManagement Products, Royal Bank of Scotland

Timothy MerrellDirector, Head of ProductManagement for US DollarHigh Value PaymentsGlobal Cash ManagementDeutsche Bank New York

Ann CairnsChief Executive TransactionBanking, ABN Amro

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leditorial comment

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April 2006issue number 31In this issue

2 News

4 Far from straight forward

6 Are you being served?

9 Future refocus

11 Releasing untapped value

13 Country Focus: Bulgaria

18 Industry Insider: Alan Koenigsberg,JPMorgan

21 Directory of services

Part of the Banking Technology

Portfolio

BACS governance takes centre stage

Danske Bank has become the firstnon-UK member of UK-basedpayments processor BACS

Payment Schemes Ltd. The Danish bankjoins the electronic payments processor’scurrent 13 members that include Britishbanks and building societies, such as Abbey,Barclays, Bank of Scotland and Lloyds TSB.

Michael Chambers, managing directorof BACS, said:“We are pleased towelcome Danske Bank as a BACSmember bank and our first non-UKmember. Since the creation of BACSPayment Schemes Ltd at the end of 2003,we have been working towards makingmembership of BACS more accessible.This latest news shows that we are alreadysome way to achieving this objective.”

This is good news for BACS in thelight of impending ACH industryconsolidation as a result of the SingleEuro Payments Area. Danske Bank willjoin the existing members in overseeingthe running of BACS and its paymentservices, including direct debit and directcredit, and therefore extend theprocessor’s credibility in the Europeanpayments space.

Danske Bank’s membership alsofurthers its interests in the UK, followingits acquisition of Northern Bank at theend of 2004.

“During Easter of 2006, National IrishBank and Northern Bank will be migratedto Danske Bank’s central IT platform. Inthat connection Danske Bank has becomea member of BACS. Danske Bank isalready a member of retail clearing systemsin all other countries where it has retailbanking activities,” said Jørgen Klejnstrup,chairman of Danske Bank International.

However, it has not all been goodnews for the payments processor thismonth.The Office of Fair Trading’sPayment Systems Task Force hasexpressed concern about the lack ofcustomer involvement in the decision-making process of BACS PaymentSchemes Ltd. A lack of consumer andbusiness involvement in the governanceof BPSL is of particular concern due tothe fact that it has a market monopoly inpayments processing.

The task force, which was set up in2004 to resolve payment system issuesover a four year period, hopes to enablewider participation in BPSL governanceby setting up a forum to brief businesses,consumer groups and other interestedindustry stakeholders on current andforthcoming issues.This ‘affiliates interestgroup’ would also allow these groups toinfluence the decision-making process byraising issues of concern.

Jonathan May, OFT director of marketsand policy initiatives and chairman of thetask force, said:“Consumers and businessesusing BACS can now have a real voice inthe future development of BACS payments.This report represents another success forthe task force approach and I am grateful toall those who contributed to it.”

As well as the proposed interest group,the task force also recommended that aconsultation process be set in place toallow interested parties that are not‘affiliates’ to contribute their views onBPSL proposals. Furthermore, BPSL willfollow a broader objective to promote“efficiency and innovation in payments,responding to user and market needs in anefficient and cost effective manner.”

The BPSL has been charged with thetask of implementing these changes overthe next 12 months, at which point it willreport back to the task force about itsprogress.To this end, the affiliates groupcurrently comprises 20 organisationsincluding larger businesses and governmentdepartments.

The task force is also consideringproposals that were put forward by one ofits members, the Association for PaymentClearing Services, which would have asignificant impact on the governance of anumber of payment schemes.

In stark contrast to its resounding criticismof the European Commission’sConsultative Paper on Single Euro Payments

Area Incentives, the European Savings BankGroup has praised the European CentralBank’s Fourth Progress Report:Towards a SingleEuro Payments Area for its “pragmatic”approach.

It seems that everything that was wrongwith the incentives paper has beenaddressed by the ECB’s report. Forexample, where there was room formisinterpretation in the incentives paper,the ECB report provides clear emphasison the specific objectives of SEPA and abalanced assessment of what has beenachieved so far by the industry.

“We certainly take heart from the factthat the European Central Bankunderstands the complexity of this projectand the need for a pragmatic, realistic and

phased approach,” said ESBG managementcommittee chairman Chris De Noose.

This approach involves a firm outline ofwhat is expected from the industry overthe next two years and beyond.The focusis on allowing banks to maintain viableand profitable business models as they areadapted to the SEPA roadmap.The use ofa gradual approach would allow theindustry to progress to the next investmentcycle as a matter of organic development.

“The report helps banks deal with themigration period to 2008 and 2010 byproposing a clear division of responsibilities– public authorities to clarify the finalobjectives of SEPA and the bankingindustry delivering the specification of thenew payment instruments – and by stressingthe importance of creating commonstandards and procedures,” De Nooseexplained.

ESBG praises ECB’s SEPA progress report

april 2006 international payments2

NEWS

Norges Bank

chooses SIA

Italian banking technology vendorSocietà Interbancaria per l’Automazione(SIA) has announced that it will be

providing the central bank of Norway,Norges Bank, with a new real time grosssettlement system.

“By outsourcing the payment system,Norges Bank has taken one more steptowards concentrating on its coreactivities,” said Jon Solheim, executivedirector of Norges Bank FinancialStability.

Under the terms of the contract,which is estimated to be worth E3.5million, SIA is charged withimplementing a second generationRTGS system and providing the centralbank with ongoing maintenance andsupport for the next six years.

Twist announces collaboration with Bolero

Following last month’s announcementabout its collaboration with PKIprovider Identrus, open standards

group Twist has again signed an agreementwith another high profile industry body:open platform provider Bolero. Under thiscooperation agreement,Bolero will becomea member and sponsor of Twist andparticipate in working groups related totrade finance.

The partnership is aimed at promotingmomentum in the delivery of standards inthe corporate to bank space, especiallywith regards to the reflection of corporateneeds in these standards.

Arthur Vonchek, chief executive ofBolero, explained:“There is a fundamentalshift underway from proprietary bank-centric solutions to corporate-centric multi-banking and standards.Twist’s emergence insupport of the standardisation of transactionsbetween banks and their corporatecustomers is a very important initiative forthe industry. In pursuit of the same strategicgoals, cooperation between Twist andBolero will provide clear added value forour customers and the community ingeneral, as well as reciprocal value.”

Despite the common industry perceptionof Bolero as a standards body, which was itsoriginal purpose at its inception, it is not incompetition with Twist. Bolero provides anopen platform to enable paperless trading

for the merging of the physical andfinancial supply chain, whereas Twistremains engaged in developing commonstandards in this space.

Tom Buschman, chairman and chiefexecutive of Twist, commented:“Thedomain expertise Bolero has gathered inthe effective implementation of the entireletter of credit and guarantees lifecyclesfor both importers and exports and theirbanking partners has resulted in a uniqueunderstanding of the standards required tosupport this activity between thecorporate and its banks. Contributing thisknowledge capital to the Twist programprovides a fast-start to the effectiveadoption of Twist standards in this space.”

Accordingly, Bolero has said that it willcontribute its expertise in these areas as abasis for the creation of formalised Twiststandards in the future and support themapping of these standards onto theBolero multi-bank automation platform.

Earlier in the year, Bolero completed anew internal funding round led by itsexisting investors and attributed this tothe rising interest of the market in itsplatform.At this time, it announced afurther seven financial firms that havegone live with the platform: Credit Suisse,ING Wholesale Banking, Dresdner Bank,Zürcher Kantonalbank, HypoVereinsbank,Fortis Bank and HSH Nordbank.

The Bank for InternationalSettlements’ Committee on Paymentand Settlement Systems and the

World Bank released a consultative reportentitled General principles for internationalremittance services on 13 March. It provides ananalysis of the payment system aspects ofremittances, on the basis of which it sets outgeneral principles designed to assistcountries that want to improve the marketfor remittance services.

The report, which was prepared for theCPSS and the World Bank by a taskforceconsisting of representatives frominternational financial institutions andfrom central banks in both remittance-sending and remittance-receivingcountries, deals with the practical realitiesof how money is transferred during theremittance process. It provides five general

principles for the remittance marketdealing with five areas: transparency andconsumer protection; payment systeminfrastructure; the legal and regulatoryframework; market structure andcompetition; and governance and riskmanagement.

Co-chairmen of the report, MarcHollanders, head of secretariat at the CPSS,and Massimo Cirasino, senior financial sectorspecialist at the World Bank, explained:“Understanding these payment systemaspects is crucial to understandingremittances and to ensuring that remittanceservices are safe and efficient.”

The report is being issued as aconsultation document and comments areinvited from any interested parties, whichmust be submitted to either the CPSS orthe World Bank by 18 August.

BIS and World Bank release remittances report

Despite the delays and uncertaintythat has surrounded many aspectsof the Single Euro Payments Area

over the last year, it appears that resolutionfor one of the remaining outstandingissues is finally at hand as the EuropeanPayments Council approved the SEPACards Framework on 8 March.

Gerard Hartsink, EPC chair, said:“I amdelighted with the consensus that we haveachieved and the progress that we continueto make in this ambitious programme”.

The framework provides the high levelprinciples and rules that are aimed atenabling European customers to usegeneral purpose cards to make cashpayments and withdrawals in eurothroughout the Eurozone in the samemanner as their own domestic payments. Ituses a three tier model for progress thatencompasses the framework itself, the cardschemes and the infrastructure providers.

The framework is the actual documentto which banks and card schemes in theEurozone must commit in order toaddress the expectations of the EPC, theEuropean Central Bank and theEuropean Commission for SEPA.

The other two tiers of the model dealwith the practical realities for those involvedin SEPA.The second tier deals with thecontext within which the card schemes andtheir members must operate in order toensure interoperability and competition.Thethird and final tier deals with these sametwo issues for the providers of technicalinfrastructures and payment services, with aview to efficient and low cost processing.

The implementation of SEPA for cardsis seen by the EPC as a two-stage processwhere banks ensure that the paymentschemes of which they are participantsbecome compliant, and these banks thendeliver accordingly compliant paymentproducts to their customers.

“From our point of view, it’s a positivemove forward for Europe,” said EricTomlinson, senior vice-president for debitproducts at MasterCard Europe.“Obviouslywith so many interests involved there willbe some compromises, as well as some greyareas which will have to be interpreted andworked out as we progress.”

SEPA Cards

Framework finally

released

www.informafinance.com/ip 3

NEWS

STP


There are three options under theSwift-defined pricing model forpayments.The first involves the

originator of the payment choosing tocover the entire cost of the payment byputting “OUR” in the charges indicatorof their payment. Subsequently, the variousbanks in the payment chain pass theircharges back to the bank that sent thepayment to them, either by invoice, or byuse of a Swift message.An alternative alsoexists for the sending bank to send the

charges along with the payment, negatingthe need for the receiving bank to sendout a charges claim.

Alternatively, the originator of thepayment, in agreement with thebeneficiary can select “BEN” in thecharges indicator of their payment.Thevarious banks involved in making thepayment would then cover their chargesby making a deduction from thepayment principal.The last option,which involves selecting “SHA” as the

indicator, means that charges on thesender’s side are assumed by theordering customer and the beneficiarycustomer bears the charges on thereceiver’s side.

These arrangements have served theindustry well in Europe, although thereare differences in how they are used inother markets.The advent of the euro in1999, the use of Target for cross borderEuropean payments and the subsequentintroduction of EU Regulation

Far from straight forwardFor many years the cost of making payments has been covered by the use

of the charging options defined by Swift. Tim Decker, Euro clearing

product manager at JPMorgan Chase and chairman of the Interbank

Group on Straight Through Processing Standards and Associated Payment

Business Practice, explains why non-STP charging for euro payments is now

far from straight-forward.

www.informafinance.com/ip

2560/2001, required greater pricingtransparency, efficiency and lower costs tothe end user. Consequently, a differentapproach was required for interbankcharges.

In 2003 the European PaymentsCouncil (EPC) introduced the InterbankConvention on Payments (ICP), whichdefined STP standards for paymentscovered by the regulation. It also statedthat banks would be entitled to chargethe originating bank for any additionalwork resulting from the receipt of anon-STP basic credit transfer, as of 1January 2004.

Since the introduction of the ICP,many banks in Europe have started tolevy these charges for regulatedpayments, but additionally have extendedthis to other euro payments, interbankpayments (MT202) and even topayments in other currencies.Thesecharges are meant to encourage theoriginator of the payment to format itappropriately, which ultimately will leadto greater efficiency.

The argument for payments in whichthe beneficiary covers the payment costsis that it is inequitable for the customer topay for the inefficiency of the paymentoriginator. However, non-European banksare of the opinion that the beneficiaryalready has a contractual relationship withthe originator and can use this to exertpressure on them to improve theformatting.

These new “unregulated” businesspractices, for example, those outside thescope of the ICP, have led to considerable

market confusion and inefficiency.As aresult of this, banks have had to introduceprocesses to handle these claims. Manybanks around the world, including severalEuropean banks, do not recognise the

validity of these non-STP charges or theneed for them.They say that the cost ofpayment processing, including the need tohandle some payments manually, shouldbe covered by the existing internationalmarket practice of the use of BEN, SHAor OUR indicators.

In addition to this, some of the reasonsfor the charges are outside the control ofthe originating bank. For example, manybanks outside Europe do not have a BankIdentifier Code (BIC), so it isinappropriate for a non-STP charge to belevied for one being provided. In 2005, theInternational Financial Services Association(IFSA) wrote to the EPC requesting thatthe two organisations work together toestablish guidelines for euro paymentsoriginating outside the EU/EEA.

In that same year, this issue becameheated as relationships between banksbecame strained over these issues.JPMorgan Chase, along with a number ofother leading global and European banks,

formed the Interbank Group on StraightThrough Processing Standards andAssociated Payment Business Practice todefine STP guidelines for euro payments.Importantly, the group decided to define

the associated business practices forhandling these payments, such as whennon-STP fees could be levied and howbest to send these charges to other banks.

While the interbank group intends topromote its efforts through the EPC, itrecognises that the EPC’s workingcommittee, the Credit Transfers WorkingGroup, may not be able to work on STPguidelines until they are finished definingthe new euro Credit Transfer Scheme. InJanuary 2006, the Interbank Groupcompleted its work on defining STPguidelines for non-domestic intraEU/EEA euro payments.This work is nowbeing submitted to the EPC so that it canbe more widely accepted across Europe.

One area that the group has fallen shortis to agree on is the definition of a set ofSTP guidelines or business practices fornon-STP charging for euro paymentsoriginating outside the EU/EEA. Somebanks and organisations, such as the IFSA,question the need for any additionalcharging, the associated processing costsand the unproven benefits, and their viewsmust be considered in any agreement.Therefore, a wider forum is required forthese discussions to move forward.

While wider agreement on STPstandards for payments originating outsideEurope will help to improve the efficiencyof the payments industry, gettingconsensus is going to require considerableeffort.The interbank group has shownhow banks can work together in this wayand intends to continue its work.

Tim Decker, Euro clearing productmanager at JPMorgan Chase andchairman of the Interbank Group onStraight Through ProcessingStandards & Associated PaymentBusiness Practice

5

STP

ip

Figure 1: STP charging

“One area that the group has fallen short is to

agree on is the definition of a set of STP guidelines

or business practices for non-STP charging for

euro payments originating outside the EU”

CLIENT SERVICE


Are you being served?The future of the payments and cash management business will not

be determined by those who simply transform their back offices and

re-engineer for greater scale and lower unit costs. Instead, argues

Julian Wakeham at Capco, the future may well belong to those who

focus on efficiency in the way they engage with and service the customer.

There can be no question that, likedeath and taxes, we can be certainthat continued cost cutting will be

a part of the future for those of us in thepayments and cash management industry.Our research suggests that despite thecost cutting efforts of recent years, theaverage efficiency ratio of many paymentsbusinesses is 106%.This data is based onnormalised client examples, measured bydirect costs against direct fees.

Moreover, with fee income and netinterest income under pressure from bothregulation and competition, the financialdynamics of the business face further, and

possibly even accelerating, deterioration.In this environment, continued costcutting is not a competitive differentiator,it is crucial to simply staying in the game.

With cost cutting being such a vitalissue, there can be no question that majorchange/transformation programmes arehere to stay.A recent Capco surveysuggested that leading banks deploying afull range of ‘transformation’ techniquesin the back office were achieving up to a60% reduction in their back office costs.With this sort of success, you mightreasonably expect that this will be the keyfeature of the future for our industry –

more cost cutting and efficiencyimprovements in the back office.

In fact, that is not what we expect. Inour view, the question is not whetherback office focused transformationprogrammes are worthwhile – theyclearly are – but whether they are inthemselves sufficient? Our researchsuggests that they are not. Instead, webelieve that those looking for advantagesin efficiency in only the back office maybe looking in the wrong place.

What the future holdsWhilst operational efficiency is essential for


any high volume, largely commoditisedbusiness, its importance in terms of itsability to change the overall efficiency ratioof the business is limited to its proportionof total costs. In a typical payments andcash management business, our researchsuggests that back office costs representonly 30% of total costs, with a further 5%being external cost. By contrast, customer-focused costs, such as customer acquisition,sales, market and product management andcustomer support, represent 65% of theoverall cost stack.

Despite the fact that these activitiesaccount for over twice as much of the coststack as processing costs, few banks havedeployed initiatives to improve theeffectiveness with which they performthese activities.We think that this is amissed opportunity because there aresubstantial opportunities in the “go-to-market” areas of the business to not onlycut costs, but also to grow revenuesorganically.Whilst these vary substantiallyfrom organisation to organisation, Capco’sexperience suggests that successfultransformation of these functions can resultin annualised cost savings of between 22%and 40%, as well as a 6-12% increase inrevenue from the existing franchise.

On the revenue side, these benefitsare derived at two levels: improvedcustomer satisfaction, which increasesthe customer’s willingness to spend, andimproved pricing alignment, reducingrevenue leakage through inappropriatediscounting. On the cost side, benefits

are generated from focusing salesresources more effectively, improvingsales force efficiency, improving returnson product development andoptimising the alignment of serviceresources.

It is to those who are able to realise thebenefits of these opportunities that we

believe the future truly belongs.

Taking control of your futureThe future of payments and cashmanagement businesses lies in successfultransformation of the customer-focusedend of the business at three levels:segmenting the customer base accordingto needs and propensity to spend;aligning the sales and service model tothe identified customer segments; anddeploying a structure that will allowcontinuous focus on the needs of eachsegment and optimisation of the offer tothat segment. Each of these is addressedbelow.

Needs-based segmentationA needs-based segmentation approachrequires the bank to develop a set of

dimensions against which discretesegments of customers with broadlycommon needs can be identified.Unfortunately, for most payments andcash management businesses anysegmentation that has been done hasusually been driven by the nature of thecredit relationship with the customer,

rather than by the use of payments andcash management products. By contrast,successful segmentation balances acustomer’s needs for a transaction productwith the broader relationship needs of thecustomer.

Capco uses three inter-linkeddimensions when looking to segmentcustomers within a transaction bankingbusinesses:• customer financial sophistication – the

willingness/ability to use off-balancesheet sources of funding, advanced riskmanagement, forecasting and hedgingtechniques;

• customer operational structure – use ofERP, the degree treasury operations arecentralised/decentralised and thecomplexity of the supplier and buyernetwork of the corporate; and

7

CLIENT SERVICE

“Successful segmentation balances a

customer’s needs for a transaction product with

the broader relationship needs of the customer”

Figure 1: Transformation in practice

CLIENT SERVICE


• customer credit dependency – the needand the nature of the need for credit,for example, short/long term fundingrequirements or import/export centric.

This type of segmentation allows abank to view the full value of thesegment relative to the product mix,service model and sales approachrequired to support it. It also allows abank to identify appropriate cross-sellopportunities within the segment byviewing individual clients against thegeneric product uptake of clients inthat segment. Finally it allows a bankto optimise its pricing against acustomer’s willingness to pay, forexample, a credit dependent customermay be open to substantially highertransaction fees than an execution onlycustomer.

Operating model alignmentThe segmentation exercise is likely tomake the customer-bank interactionincreasingly transparent and alsohighlights how the interaction changesby segment and the degree to whichvalue-added support is required as part ofthe proposition for each segment. Itshould highlight which customers requirecomplex support and product bundles, asopposed to those that are largely‘execution only’, for example, those thatplace little value on relationship support.

Our research has found that smalland/or low margin customers frequentlyabsorb substantial amounts of sales andservice effort, whilst high value

customers requiring complex levels ofsupport are exposed to standard orinadequate service levels.To achievemodel alignment, each element of thesales and service functions should bebroken down and then used as building-blocks to achieve correct resourcealignment against each segment andinteraction type.

Functions that are common across allsegments and interactions can bedeveloped into simplified standard robustprocesses, whilst high-cost/intensityfunctions can be aligned to segments andinteractions where they are appropriatefor the value of the segment/interaction.If done correctly, not only is resourceallocated more efficiently, but sales andservice resource can be trained andrewarded at levels more appropriate tothe actual roles they play.

Driving continuousimprovementThe segmentation and model alignmentdescribed above should result insubstantial resource reallocation. It is thisreallocation that will drive many of thebenefits discussed earlier. However, theunderlying organisational structure maynot change substantially.Traditional front-office functions including relationshipsales, technical sales, productmanagement, product development, andimplementations, customer servicefunctions and back office functions maycontinue to be the best way to structurean organisational model – given the skillrequirements of each function.

However, if front-officetransformation is to succeed, thebehaviour of the organisation and theway these functions interact with one-another needs to change in order toachieve increasing commercial clientorientation.This customer-focusedorientation is best achieved byimplementing and emphasising a smallnumber of strategic processes thatoverlay rather than replace traditionalfunctional structures, orchestratingrather than owning resource.Whenimplemented correctly they will ensurethat segmentation and the alignment ofthe organisation remains dynamic,continuously optimising customerexperience and profitability.

In our experience, in addition to thestandard management processes eachfunctional area is responsible for, we haveidentified five strategic processes,spanning multiple functions, which arecritical to achieving the transformationand management of the payments andcash management business:• market segmentation;• proposition design;• sales and service;• deal and pipeline management; and• portfolio management.

In addition to being central to thecoordination of the front-officefunctions, these strategic processes act asinterfaces with other areas, such as theback office and broader relationshipteams.They allow cross-functionalalignment and help ensure internalfunctions remain customer orientatedand aware of the end-to-end implicationsof the customer and commercialdecisions that are being made.

Payments and cash managementbusinesses represent a critical businessline to most banks but cost bases arehigh and margins typically low.A focuson the back office has and is yieldingsignificant value, but for manyorganisations this will be insufficient tooffset the substantial and increasingburden of offering these core services. Itwill also help to differentiate them fromtheir competitors. In this environment,organisations must realign the business tothe customer segments to better leveragetheir existing franchise.

Julian Wakeham, Partner, Capco

ip

Figure 2: Aligning the go-to-market organisation


In general, the cross border paymentmarket today is based on correspondentbanking. Banks negotiate bilateral deals

in which they, on one hand, aim at beingable to send payments at the lowestpossible cost and, on the other hand, seekto receive as many payments as possible,thereby maximising fees.The gameplayed is reciprocity where the banks’income consists of float, interbank fees,foreign exchange, and customer fees, andin certain cases, rebates fromintermediaries. It is an income gamewhere costs are not the first focus pointand where the customers are often theones that pay for it all.

In Europe, SEPA will dramaticallychange all this. Firstly, SEPA paymentswill become domestic with domesticpricing. Secondly, the euro area has forsome time already been experiencing areduction in foreign exchange income.And thirdly, the New Legal Frameworksignificantly limits the banks’ ability tocreate income from float and interbankfees.This will mean that the basic focusfor banks will change from revenuegrowth to processing payments in themost cost effective and reliable way.Therefore, cost efficiency and notreciprocity becomes the key word.

SEPA is forcing financial institutions to

rethink their business models. Not onlywill we see the emergence of clearing andsettlement mechanisms, such as pan-European ACHs, SEPA-compliant ACHsand bilateral/multilateral arrangements,but we will also see an increased incentiveto outsource extended parts of thepayments process.A lot of financialorganisations will have a cost savingopportunity from outsourcing theirprocessing to a few specialist processors orfactories, which are able to achieve apositive business case through very highvolumes.This can be done on a ‘whitelabel’ basis so that the financial institutionsmaintain their customer relationships.

9

SEPA

Future refocusAt the moment all attention is centred on euro payments, but soon the focus

will also move towards restructuring international payments in general. Many

financial institutions may achieve significant cost savings by reforming

traditional correspondent banking and international departments. Introducing

new business models for “true international payments”, including the

outsourcing of international payments to processors, correspondent

banking network providers and other kinds of facilitators, is a logical

consequence of the introduction of SEPA. Henrik Parl, managing director

of Eurogiro, explains.

Up until now there has beenremarkably little development in theglobal correspondent banking set up.Thisis partly due to traditions and historicinvestments made by banks, and also dueto the fact that the correspondent bankingset up has been quite profitable. FollowingSEPA, the situation may be quite different.Firstly, SEPA may inspire the globalcommunity, including governments as wellas banks themselves, to seek reduced costsfor international transfers.

Secondly, many banks, especially if theyare European, will see a large part oftheir payments becoming domestic,thereby reducing the business case for thecorrespondent banking set up of theirremaining payments.And thirdly,hopefully the SEPA development will bea trigger for the innovative developmentof new business models, not least becauseit is likely to lead to margin pressure forglobal payments.

Future structuresIn their quest for increased profitability,financial institutions must aim at costefficiencies by reviewing the value chainfor payments.Traditionally they haveprovided all the services in the valuechain as illustrated (see diagram).

At the customer level, all financialinstitutions would wish to distinguishthemselves vis-à-vis their competitors.They would definitely not want to giveothers access to their customer base, aspayments will still be a key future servicethat can provide the opportunity to crosssell other products. It will, however,increasingly be questioned if processingneeds to be performed in-house.Theoutsourcing arrangements in Germany ofDeutsche Bank and Dresdner Bank forpayments-processing to Postbank is anillustration of the fact that outsourcingwill become more and more a simplematter of business case.

For “true international payments”, interms of network/routing arrangements,the correspondent banking set up will be

highly costly to maintain stand alone.Atleast for low value payments it can bequestioned if there really is a businesscase for an independent correspondentbanking network, except for very largebanks.The costs for this network arenumerous: internal staff, IT, networkproviders, bilateral agreements, routingand travel costs. Finforce and Eurogiroare examples of organisations which arealready positioned to provide this serviceto the banking community.

Finally, financial institutions may seekmore standardised or multilateral clearingand settlement arrangements, as themaintenance of settlement arrangementsand accounts is quite costly. In Europe,EBA and Eurogiro have createdmultilateral settlement solutions, which inprinciple could be made global.

Following the reasoning above, we seea picture emerging of financialinstitutions that focuses on what isessential for them: their customers, whilespecialist institutions will emerge tofacilitate processing, network/routing andclearing and settlement.We might evensee these specialists teaming up betweenthemselves or with banks, vendors or ITcompanies to provide alliances that willenable each of the providers to enhance

their offering. Ideally, banks would wishto outsource to one provider or to agroup of providers, as simplicity will bean element in achieving cost efficiency.However, it is not likely that any oneorganisation will be able to do everythingfor everyone.

The growth in the area of remittancesillustrates the potential opportunities forproviding efficient low value paymentservices. Remittances are interesting forthe banks, because by providing suchservices, banks can connect futurepotential profitable customers to theirorganisations. However, many banks facegrave difficulties in providing such aservice.

Firstly, they do not have the expertisein providing the product, for example, the

ability to handle immigrants, languageskills, and the ability to do cash payments.Secondly, most banks do not have anappropriate correspondent bankingnetwork to service remittances becausethe correspondent banking network istypically built around high valuepayments.With remittances, a targetedlow value payment network is needed,preferably a network with access to ruralareas and the ability to handle cash.

This means that it is extremely costlyfor banks to achieve connectivity forremittances that can enable a competitiveglobal reach. Moreover, compliancecomplicates the issue and increases therisks and this has meant that many bankshave decided to stay out of the business.What is needed is to provide banks accessto processing, network, relationship,interoperability, and compliance, thusmaking it simple and cost efficient forthem to offer this service to theircustomers.This is what companies suchas Western Union, MoneyGram andEurogiro do, and over the years, we haveseen the emergence of numerouscompanies with a variation of servicesand products.

Although SEPA is the current industryfocus, we already have seen many

examples of the above global trend tomake global low value payments moreefficient.As financial institutions seek costefficiencies, key words for the future willbe interoperability, global reach, multipleproduct coverage (credit, debit andremittances), outsourcing (processors andfacilitators), and a cost rather thanincome focus.The process will be partlydriven by an internal drive for costefficiency and by external pressure fromthe market for lower fees. So in the end,the process may be beneficial to all: thefinancial institutions, the customers andthe companies specialising in offeringthese services.

Henrik Parl, managing director,Eurogiro Network A/S

SEPA


ip

Country A

CustomerProcessing

Network/

Routing

Clearing &

SettlementProcessing

Country B

Customer

Figure 1: Services in the value chain


This approach can generatesignificant working capital benefitsfor both buyers and suppliers,

positioning firms to capture earlypayment discounts. In a highly process-oriented, risk-averse financialenvironment, where invoices are matchedagainst purchase orders and goodsreceived notes in an accurate and timelymanner, specialist financiers and bankshave also recognised an opportunity toprovide supply chain financing as asource of new business.

Although web-based technologiessupporting e-invoicing have beenavailable for a decade, more than 85% ofinvoices are still printed on paper anddistributed by post.Whilst there are somenotable exceptions, it can be challengingfor a buyer to impose on all of itssuppliers a standard format electronicinvoice, since each supplier will have itsown way of processing outboundinvoices.A more practical approach isneeded to resolve this road-block on themigration to AP automation.

Taking the first stepRecognising the ongoing prevalence ofpaper-based invoicing, corporate clientsare adopting a more evolutionaryapproach to invoice management as theymigrate towards fully-fledged forms of e-commerce. Under this pragmatic model,inbound paper invoices are scanned, datais extracted, validated and matched beforebeing routed electronically for approval inan efficient and timely manner. Such asolution can be structured in-house oroutsourced to a specialist provider withthe scale and experience to masteradvanced paper handling techniques, datacapture and matching processes.WithCFOs under pressure to reduce costs andimprove working capital, outsourced

invoice management services can providea low risk way to achieve these targets.

Today, with more efficient systems forhandling paper invoices and resolvinganomalies, processing times can bereduced from days to just a few hours.Thesolutions that stand out are those whichcan successfully handle both paper andelectronic invoices.The powerful barrierhindering the growth of the e-invoicingmarket is getting suppliers on board.However, on-boarding for suppliers can beas simple as asking them to redirect theirinvoices in any format, whether paper,PDF or e-invoice, to an experiencedinvoice management solution providerwho will take care of converting paperdocuments into electronic formats,capturing and normalising the data to suitthe requirements of the payer.

Capture the discountToo many corporate clients are missing anopportunity to reduce the cost of goodsdue to their inability to capture earlypayment discounts on supplier invoices.This is because their accounts payableprocesses do not currently allow them toquickly identify invoices where discountsare available and approve them in time tocapture the discount.

Businesses have long recognised that“cash is king.” For a small business withcash flow problems, an invoice issued to alarge corporate payable in 30 or 60 daystime can be small comfort.That is whymany businesses of all sizes offer earlypayment discounts to encouragecustomers to settle trade debts early.

In an open account relationship,probably the most widely used trade termis “20/10 net 30”.This means that if atrade debtor pays an invoice within 10days of the issue date, he can deduct a 2%discount and pay 98% of the face value of

the invoice, resulting in a reduction incost of goods.This discount equates to amassive annualised interest rate of 36%per annum, assuming these invoices arepaid on the tenth day, but serves as apowerful reminder of the high value abusiness places on getting paid quicklyand improving its cash flow.

Since few financial managers today canfind a safe investment offering a return of36% per annum, it is easy to see thattaking advantage of early paymentdiscounts can be good use of a business’valuable cash resources. But the factremains that many AP departments arenot structured to take advantage of thesefavourable terms, since it typically takesmore than 10 days to process and approvean invoice for payment using traditionalmethods.

With automated invoice management,invoice data can be validated and matchedto a corporate client’s ERP within a fewhours of receipt.The payer can captureearly payment discounts and the suppliergets paid within 10 days, with significantcash flow benefits. Even in thosesituations where suppliers are not offeringearly payment discounts, efficient invoicemanagement capabilities position acorporation to negotiate dynamicdiscounting with its supply chain. Somuch so that Gartner is predicting that by2009, at least 30% of the global 2000 willhave adopted dynamic early paymentdiscounts as a standard practice in AP.

Working capital managementgets collaborativeNaturally, one drawback of early paymentfor corporate clients is having to use theircash to capture the discount benefit.Acollaborative enhancement of this modelis to work with a financier who bridgesthe funding gap in order to solve that

11

PROCESSING

Releasing untapped valueIn this article, Marcus Hughes of Bottomline Technologies explores

practical ways of enabling large corporate clients to significantly streamline

the processing of paper and electronic invoices within the accounts payable

function.

april 2006 international payments

PROCESSING


age-old timing conflict between buyerand supplier, whereby the buyer wishesto delay invoice payment as long aspossible, while the supplier wishes to getpaid as soon as possible.

Specialist financiers have been amongthe first to participate in this structuredfinancing opportunity.The combinationof web-based technologies and supportivefinanciers is enabling suppliers to get paidearly without using the cash of the payerto make early payments.At the maturityof the invoice, the financier’s advance isreimbursed by the payer.

There is a range of financing options,including non-recourse finance, whichachieves a valuable off-balance sheetsource of funds for the supplier.This ispossible with the payer’s full agreement,where the invoice management solutionhas already achieved a successful matchagainst a purchase order (PO) and,ideally, a goods received note (GRN).The matching of these vital elements toa trade transaction enables financiers toreduce risk in making an advance, sincethere is a high degree of confidencethat goods being financed have beenordered and received by the payer.Thisgreatly increases the likelihood that thepayer will in due course pay for thegoods.

In a trade model where the supplier isa small- to-mid-sized enterprise (SME)and the buyer is a large organisation witha high credit rating (for example,A-1 /P-1 for commercial paper), there is anopportunity for interest arbitragebetween the credit quality of the payerand the supplier in which all parties tothe transaction can benefit.The financier,having reduced the risk of non paymentof the invoice through automatedmatching against a PO and GRN, canafford to offer competitive rates ofinterest to the supplier for early paymentof the invoice.

This would typically be financed at arate of interest lower than the suppliermight normally achieve on early paymentdiscounts, factoring facilities or overdrafts.This structure reduces the cost of fundsfor participating SMEs and enables themto free up working capital faster.This“belt and braces” approach of usingvaluable trade data from both the buyerand the supplier enables the financier tominimise the risk of fraud, a longstandingproblem in conventional factoring where

more than one supplier has been knownto present false invoices and requestfinance.

It will also not have escaped thethinking of specialist trade financiers thatunder the new Basel II requirements,structured lending facilities, which achievea high degree of transactional control andmake use of techniques such as credit risk

transfer, qualify for lower capital reserverequirements than unstructured creditfacilities to lower credit quality borrowers,such as SMEs.As a result, by transferringrisk to large payers with strong creditratings at the top of supply chains, thefinancier can achieve a lower Basel IIcapital requirement.

Extending trade credit termsfor payersIn some cases, financiers are allowingpayers to extend their trade credit terms.Under this model, the supplier gets paidby the financier within a few days ofinvoice approval, but the payer is allowedto delay settlement of the invoice until alater date, thereby achieving, for example,30 days additional credit.This iseffectively a reward for giving thefinancier visibility into the approvedinvoices so that the financier can offerearly payment finance to suppliers.

Offsetting the impact ofpayment regulationGiven the availability of web-basedtechnologies and invoice managementservices capable of processing thesetransactions on a large scale, the door isnow open for commercial banks andtrade finance banks to adopt thisstructured finance approach.This newsource of revenue could proveparticularly attractive to banks at thecurrent time when they are in search of

value added services to shore up theirrevenue streams from other moretraditional areas.

The new regulations on EU paymentsand the infrastructure investmentrequired to comply with the SingleEuro Payment Area initiatives, forexample, are resulting in significantlylower profitability forecasts for many EU

banks in payments and cashmanagement. So it may prove goodtiming that just as forward-thinkingbanks are tending to combine cashmanagement and trade finance lines ofbusiness, they are now better positionedto exploit the arrival of purchase-to-paysolutions on a scalable basis throughwhite-labelling partnerships with serviceproviders.

While end-to-end electronicinvoicing remains some time away, fornow, successful invoice automationinitiatives are proving to be thosecapable of handling both paper andelectronic invoices in an evolutionaryfashion. Recently, a handful of pilotshave been launched using structuredsupply chain finance models.To date,these have been hindered by theshortage of electronic invoice workflow,and thus the difficulties inherent intrying to match invoices manually in atime frame to allow for capturing earlypayment discounts.

This challenge can now be solvedthrough the combination of an accurateand timely paper and electronic invoicemanagement solution and innovativefinanciers ready to help buyers andsuppliers extract maximum value fromthe financial supply chain, with bottomline benefits for all participants.

Marcus Hughes is head of Bankingfor Bottomline Technologies Europe

ip

“In a trade model where the supplier is a small-

to-mid-sized enterprise and the buyer is a large

organisation with a high credit rating, there is an

opportunity for interest arbitrage between the

credit quality of the payer and the supplier in

which all parties to the transaction can benefit.”

Currently, the economy is performing well as it isgrowing at a steady pace of around 5% a year and thecountry has moved rapidly towards the Maastricht

Criteria on nominal convergence.This progress was facilitatedby the foundation work of the government and its imposition ofa fixed exchange rate of the Bulgarian lev against the Germandeutschemark in 1997 and the negotiation of an InternationalMonetary Fund standby agreement.

This 14-month standby agreement expired in June 1998 andthe government and the IMF reached a longer term agreementin July 1998 on a three year loan worth about US$800 million.This loan has been used to drive the economic reform processforward, which after 2001, focused on moving towards EUaccession. However, it was not until 25 April 2005 that Bulgariasigned the Treaty of Accession.

Low inflation and steady progress on structural reforms haveimproved the business environment. Bulgaria has averaged 4%growth since 2000 and has begun to attract significant amountsof foreign direct investment.The annual year-on-year GDPgrowth for 2006 is expected to total 6.0%.

The Bulgarian National Bank (BNB) has therefore evidentlybeen successful at working on maintaining price stability byensuring national currency stability.The European Commission’s2002 regular report on the progress towards accessionhighlighted the status of Bulgaria as a functioning marketeconomy but stressed that competitive pressures are likely toincrease over time as a result.The impending EU accessiontarget date has therefore led the BNB to focus on the issue of

competitiveness in the Bulgarian economy.Accordingly, theNational Economic Development Plan 2000-2006 identifies thisas a number one priority which needs to be monitored closely.

To this end, the BNB has focused on issuing activities,managing international reserves, servicing cash circulation,organising and overseeing payment systems, and regulating andsupervising banks in the country as prescribed in the Law onthe BNB.With regards to payment system oversight, the BNB’srole is defined by the legislation:“The BNB shall be responsiblefor the compatibility and unified functioning of the paymentsystems in the country.”

The central bank’s issuing activity is governed by the currencyboard principle which stipulates that the bank exchangesnational currency only against foreign currency at the rate set bylaw.This was previously pegged to the deutschemark and waslater changed to the euro.

In early 2005 the National Assembly adopted someamendments to the BNB’s operating practices.According tothese amendments the central bank’s major objective is tomaintain price stability in accordance with the Statute of theEuropean System of Central Banks (ESCB) and the EuropeanCentral Bank (ECB). Maintaining price stability is connectedwith ensuring the stability of the national currency, as areflection of the currency board specifics.

The World Bank has praised the progress that the Bulgarianeconomy has made over the last five years and in its report,Bulgaria:The Road to Successful EU Integration, which waspublished in November 2005.The report underlines this


Country Focus: BulgariaBulgaria is in South-eastern Europe and borders the Black Sea between

Romania and Turkey. It is a former communist country and up until 1989, it was

ruled by the Bulgarian Communist Party, which has now been renamed the

Bulgarian Socialist Party and remains a part of the coalition government. The first

free elections took place in 1990 and in July 1991, a new constitution was

adopted. However, a major economic downturn in 1996 as a result of the

country’s difficult transition to capitalism, caused the fall of the socialist

government and the opposition Union of Democratic Forces took over. In

reaction to these problems, which included an unstable and decapitalised

banking system, the UDF’s focus turned to economic reform and responsible

fiscal planning. This in turn, paved the way for discussions about Bulgaria’s

entrance into the European Union, which is finally scheduled to happen in 2007.

COUNTRY FOCUS

achievement:“Over the last seven years Bulgaria has madeimpressive progress towards long-term stability and sustainedgrowth.As a result of sound macroeconomic policies and deepstructural reforms, average growth has reached the levels of eightEuropean Union new member states (NMS8).”

There are still concerns about the resilience of Bulgaria’seconomy and according to another report released in January thisyear, despite the economic progress that has been made, it remainsfar below the European average.“Although Bulgaria exceedsRomania, it lags far behind Hungary and the Czech Republic.The Bulgarian economy as a whole is extremely vulnerable toshocks, particularly those coming from the Eurozone” said thereport, which was commissioned by President Georgy Parvanov.

The World Bank’s 2005 report also acknowledges theseshortcomings:“The country’s per capita income, at PPS in 2003,was 31 and 56 percent of the average level of EU25 and NMS8countries, respectively. Given Bulgaria’s large income gap withEU25, improving the efficiency of the economy is necessary toensure that forthcoming EU accession will rapidly narrow thegap and result in sustained improvements in living standards.”

In order to bring Bulgaria into line with these countries, thereport recommends that the government should focus onincreasing employment and productivity, as well as reducingregulatory complexity and effectiveness. Macroeconomic stabilityis essential in order for the government to effectively worktowards these goals:“The reform agenda needs to be supported bymacroeconomic policies that address the risks and vulnerabilities,and make progress towards monetary integration.”

BNB and legal foundationsThe BNB’s role is therefore central to the country’s economicwellbeing and this role is clarified under the Law on the BNB andupdated by various related laws that have been passed since. Onesuch piece of legislation is the Law on Funds Transfers, ElectronicPayment Instruments and Payment Systems, which came into forceon 8 October 2005 and responds to the government’s goal ofregulatory harmonisation in the electronic payments space.

This government priority is explicitly stated in its strategy foraccelerating Bulgaria’s negotiations for accession to theEuropean Union:“As a matter of priority, BNB must transposethe requirements concerning gross settlement systems in realtime. Projects are developed for amendments to the legalframework concerning the introduction of a real-time grosssettlement system.”

The 2005 electronic payments regulation deals directly withthis requirement and governs:• the execution of domestic transfers;• the execution of cross border transfers;• the issuance and use of electronic payment instruments;• the establishment and operation of payment systems;• payment systems oversight; and• procedures for the out-of-court settlement of disputes in

relation to the execution of transfers or the issuance and useof electronic payment instruments.

This law achieves full compliance with the EU Directiveson cross-border credit transfers and on settlement finality, andalso with the recommendation on electronic paymentinstruments.

According to the electronic payments law, the oversight of theBNB covers systems operators, participants in these systems,including performing institutions, intermediary institutions,issuers of electronic payment instruments and all other personsrelated to the functioning of the systems, and paymentmechanisms for corporate and government securities. In thisendeavour the BNB is authorised to undertake on-siteexamination and demand that all participants provide therequired documents and information on their activities.

After the signing of the Treaty of Accession, the BNBobtained observer status in the ESCB, which gave the governorof the bank the right to take part in the meetings of the ECBGeneral Council and the BNB experts the option to participatein the ESCB committees.At the same time, the central bank alsodrafted its strategy for the BNB development in the period 2004– 2009, which deals with the country’s accession strategy.

Furthermore, the 2005 Law on Amendments to the Law onthe BNB introduced additional guarantees for the institutional,personal, financial and functional independence of the centralbank in compliance with the treaty establishing the EU and thestatutes of the ESCB and the ECB.The other amendmentsintroduced by this law regard the BNB’s functions related to thesurveillance of payments systems, the security of banknotes andcoins against counterfeiting, and the central bank’s internal audit.The amendments also fully ban any financing provided by thecentral bank to the government.

The BNB is the governing authority that has the ability to grantlicenses to permit institutions to function as payment systemoperators.These institutions must meet certain requirements inorder to be granted permission, including being established as ajoint stock company with a seat in Bulgaria and having aminimum subscribed capital of at least Lv5 million.There is also aprescribed minimum level of education and training for themembers of the management of the system.The BNB may revokea license in the event of any serious violations in terms ofoperation and may issue written warnings prior to this action.

Following a series of measures in 2004, the BNB extended therange of liabilities to be included in the calculation of theminimum capital required reserves to be held at the central bankfor the most aggressive lenders, in April 2005.This piece ofregulation left the minimum reserves at 8% of the deposit base,but ceased acknowledging banks’ cash reserves as reserve assets,as well as extending the range of liabilities.

Two additional thresholds were introduced dealing with loangrowth over a certain figure and the sum of extended loans andrisk weighted off-balance sheet items converted into balancesheet assets, less banks’ own funds if they exceed 60% of thefunds that the banks have attracted. Over these thresholds, banksare required to deposit double the amount of excess over thequarterly lending growth.

The operations of commercial banks are defined and regulatedby the 1997 Law on Banks, which also provides for theestablishment of new banks and the penalisation of theseinstitutions.This law also regulates the operation of foreigncredit institutions. Bank customers are protected by the Law onBank Deposit Guaranty.

As of January 2006, there were 28 Bulgarian banks and sixbranches of foreign banks registered by the BNB to operate inthe country.At the end of January, the total assets in the banking

COUNTRY FOCUS


system amounted to Lv31,762,278 thousand, which relative toDecember 2005, is a drop of 3.3%.

The Association of Commercial Banks is an independentrepresentative organisation that was established in 1992 by theState Savings Bank, which later became DSK Bank in 1999, andthe other commercial banks in the country.The ACB currentlyhas 27 member banks and its main goals are to aid its membersin accomplishing their banking activities and protecting theirrights and interests.

Payment systems definedA payment system is defined in Bulgarian law as a system thatensures the execution of transfers between its participants, ofwhich there must be at least three, with the exception of thesettlement agent. It must also function on the basis of a writtenagreement, containing general rules and standardisedarrangements for the execution of transfers.All payment systemsmust retain transaction orders for a minimum of five years asfrom the date of submittal.

Participants in any of the Bulgarian payment systems fall intoseveral categories:• system operators of other payment systems in Bulgaria;• the BNB;• commercial banks and branches of foreign banks;• a central counterparty that accepts the orders of other

participants in the system;• other countries’ central banks; and• the ECB.

Historically, there were two main payment systems inBulgaria: the Bank Integrated System for Electronic Transfers(BISERA), which was established in 1992, and the national cardoperator BORICA, which was established in 1995. During the1990s, most of the non-cash payments were settled through thenet settlement system, BISERA, which operated on a T+1 valuedate basis.Two securities settlement systems were alsoestablished: the Government Securities Depository in 1992 andthe Central Depository AD in 1996.

This all changed in September 2002, when the real-time grosssettlement system was launched, following its development bythe National Committee on Payment Systems.The committeewas established in 1999 with the express purpose of formulatingthe strategy for the development of a national payment systemand it began work on the Real-time Interbank Gross SettlementSystem (RINGS) after the terms of reference were agreed inNovember 2001.

The development process included an open internationaltender procedure for the selection of the main contractor for theRTGS system, which began in February 2001.This procedurewent through several rounds but was completed on 31 July2001, when the BNB concluded a turn-key agreement for thedelivery and a software support agreement with US-basedpayment system vendor Montran Corporation.

The implementation of the RINGS system was split into fourdistinct stages: specification, customisation, performance and liveoperation.The system finally went live on 16 September 2002 andthe design of the system complies with the Bank for InternationalSettlements’ Core Principles for Systemically Important PaymentSystems, the ECB standards and the ANZI and Swift standards.

The introduction of RINGS necessitated some amendmentsto the regulatory framework governing the country’s paymentsystems.The Electronic Trade and Electronic Signature Lawcame into effect on 7 October 2001. In August 2002, BNBRegulation Number 3 on Payments was fully amended, andnow its name is Ordinance Number 3 on Non-cash Paymentsand the National Payment System. Other regulations were alsoamended, including Ordinance Number 16 on the Paymentswith Bank Cards providing for the transactions associated withthe national card operator BORICA.

Moreover, the RINGS Rules and Procedures, and theGuidelines on the Operation of the System Operators were alsoadopted: the Operating Rules of BISERA, the Guidelines onPayments by Bank Cards, and the Instructions issued by the BNBand the Central Depository AD on the Payments Effected underBook-entry Securities Transactions were all altered accordingly.Allthese systems now have interfaces with RINGS in order to enablethem to send settlement requests.The Government SecuritiesSettlement system has a real time interface with the system.

RINGSRINGS performs irrevocable and unconditional settlement ofall payments in Bulgarian lev within the country.Thesettlement agent is the BNB and accordingly, the central banksets up, organises, regulates, controls, operates, administers,supports, develops, and oversees RINGS. It also owns RINGSand determines the rules for participation in the system and thecontingency arrangements.Through settlement at the BNB, theliabilities originating from the transfer of funds and securitiestransactions payments are settled with finality.

In order to participate in RINGS, applicants must set upsettlement accounts at the BNB. Banks must be licensedinstitutions and system operators must be authorised by theBNB board of management. Each participant has equal right toaccess the system within its hours of operation as specified inthe RINGS rules and procedures.The commercial bankparticipants must keep a covering balance on their accounts thatis sufficient to settle all of their payment instructions.


COUNTRY FOCUS

Figure 1: Volume of payment instructions handled by RINGS over2005 by time band

In June 2005, the number of RINGS participant banksdecreased to 35 as a result of the exclusion of the InternationalBank for Trade and Development. Despite the revocation of thebank’s license last year, there appeared to be no adverseconsequences for the banking community or the payments process.

RINGS will only handle payment instructions that aredenominated in Bulgarian lev but it will accept payments up toany amount.The payments that are accepted by the system are:• payments between commercial banks and payments at the

express order of a commercial bank’s client;• all client and budget payments, as well as payment orders on

cash collection requests equal to or exceeding Lv100,000;• payments on settlement requests submitted by system

operators;• payments between the BNB and a commercial bank;• payments on transactions in government securities;• payments associated with the self-initiated collection of fees,

interest and commission charges by the BNB;• payment on execution levied against accounts of commercial

banks; and• settlement requests on payments of government budget

spending units submitted by the BNB General AccountingDirectorate.

In order to ensure the smooth functioning of RINGS, the BNBhas developed mechanisms to cover liquidity needs, including areserve guarantee fund. Participants in the system must signcontracts with the central bank before they can access this fund.Each RINGS participant is under an obligation to notify the BNBimmediately in the event of an actual or potential occurrence ofliquidity difficulties.At this time, they must also indicate the stepsthat they have taken to overcome the problem.

Furthermore, the system allows for three priority levels to beset for a payment: ‘low’, ‘high’ and ‘systemic’ priority.The lowpriority is applied to payment orders initiated by banks and thiscategory is also used for all payments that have not already beenset another priority. High priority is only actively assigned by

banks, although it is automatically applied to all payments frombanks to the BNB.

The systemic priority payment category is limited topayments on BNB-initiated collections of amounts fromsettlement accounts and on settlement requests submitted bythe system operators.There is a hierarchy within thiscategory that means that the former type of payment issettled first.

The BNB is able to alter the RINGS operating schedule at anytime and it publishes the updated timetables at least once a year.

RINGS uses the Swift network and the Swift FIN Y-Copyservice for the interbank flow of payment messages. If thefunds held on the settlement account of the payer areinsufficient, the payment order is queued and the payer is ableto alter the priorities of the payments in a queue at this time.If they are not prioritised, the system settles them on the firstin, first out principle. However, if these payments have notbeen settled by the end of the day, RINGS returns them.

Therefore, the payer sends a payment order to the receivingbank via Swift for settlement in the system, which is thenintercepted by Swift FIN Copy and converted into a settlementrequest.The original message remains queued in Swift until itreceives either a confirmation of settlement or a message thatthe payment has been refused, which is then transmitted to theparticipant.

The BNB ensures the acceptance, verification and validationof payment orders and settlement requests, in which theparticipants are identified by their Bank Identifier Codes.Thecentral bank also provides for the accurate recording ofaccounting operations performed on the participants’ settlementaccounts and the generation of account statements and relevantinformation for these participants.

Gridlock resolution procedures are in place to deal with theevent that two or more queues of pending payments areblocked.An automatic mechanism for resolution is invoked if itis possible to execute the settlement of all pending payments orall those prioritised as high or systemic priority. Participants arenotified of the gridlock by the BNB via an MT298 message.

COUNTRY FOCUS


Figure 2: Value of payment instructions handled by RINGS over 2005by time band in millions of lev

Figure 3: Volume of payments in 2005 by system

The gridlock can also be dealt with manually if no partialunblocking of the queues is possible.

There are contingency measures in order to deal with theoccurrence of technical problems in the system, including aback-up system.The BNB is then tasked with the job ofrestarting RINGS operation on the first business day after therepair of the problem. System participants are also obligated toinform the BNB immediately upon the occurrence of anyproblems that may lead to increased operational risk.

According to the 2005 BNB report on payment systems inBulgaria, 70% of the amount of effected payments in thecountry were processed by the RINGS system. However, thesepayments only comprised 0.62% of the total number ofpayments processed in Bulgaria. Between 1 January and 31December last year, RINGS payments numbered 782,736 at atotal of Lv163,830 million.

In terms of daily average payments, RINGS experienced anincrease of 41.5% on 2004 average volume and an increase of30.4% on average value.This highlights the growing numberof non-cash payments that are being processed by the systemand, in order to cope with the rising level of risk that thisentails, the BNB has been actively encouraging paymentsearlier in the processing day. Accordingly, over the first half of2005, 48.5% of payments were processed by noon and 75.8%by 2.30pm.

If payments are processed earlier in the day the risk ofpayments not being effected by the end of the day issubstantially reduced.The busiest time in the system over thatperiod was the morning, as 92.1% of RINGS payments wereeffected by 2.30pm. Participant behaviour also lowered risk overthe first half of last year as no payments were rejected due toinsufficient funds. New system software was implemented over2005 in order to improve the operation and facilities of RINGS.The system offered 99.71% availability over the year.

The BNB is focusing on bringing RINGS into line withTARGET2 operating practices with a view to integration after

Bulgaria’s accession to the Eurozone. RINGS therefore providestechnical possibilities for processing payments in euros andexecuting international payments.


COUNTRY FOCUS

Figure 4: Value of payments in 2005 by system

RINGS operating timetable

7.30am: Start of day procedures.

8am: System opens for operation. RINGS accepts payments from the unified budgetary paymentsystem (SEBRA) submitted by the BNB’s general accounting directorate. Commercial banks arealso able to submit real time settlement requests from this time.

9.30am: RINGS accepts a settlement request from BORICA.10.30am: RINGS accepts a settlement request from BISERA.

2pm: RINGS accepts another settlement request from BORICA.

3pm: RINGS accepts a settlement request from CD AD.

3.30pm: RINGS accepts another settlement request from BISERA.

3.45pm – 5.30pm: Period for the provision of liquidity to commercial banks and government budget centralisation.

5pm: ROF activities initiation if needed.

5.30pm: End of system day.

5.31pm: System shut down procedures.

6pm: End of day

Next month: Chile >>

With over 10 years of experience in working withUS ACH systems you must be well-versed in thekey challenges of the industry – now that Check21 has been implemented, what is the next bigchallenge for the market?This is a great question. In terms of the growth of the US ACHand after the roll-out of Check 21, the next biggest challenge isrisk management and safety and soundness in the market. I thinkthat as cheque writing comes down from both the consumerand the business perspective, fraud also begins to move fromtraditional paper fraud into the electronic world.The ability forthe industry to come together and create better riskmanagement protocols and creating more safety and soundnessin the industry are important tenets that I would point out arethe next big challenges for the industry.

Another challenge will be scheme consolidation. Every timesomething new comes out we develop a new scheme, or as theysay in the US, a new ‘rail’ for payments. So now you have a verywell run ACH application that pumps through something to thetune of 14-15 billion transactions, of which JPMorganoriginated 3.4 billion last year.And now you have a Check 21scheme that is taking traditional paper cheques and imagingthem. One of the next big opportunities in the market is toconsolidate those two schemes together so cheques can still beissued and truncated on a Check 21 scheme and perhaps even

settled on an ACH. I think there are moves in the industry rightnow to begin those dialogues. It would be a win-win for all ofthe customers, both the consumers and the businesses, becauseyou are leveraging a known and trusted payment system: theACH.The focus is on the future.

So my headlines are: one, the safety and soundness of theindustry, and the second is consolidation.

Globally, I think that outsourcing is likely to grow in themarket over the next few years.At the end of the day, a payment’sa payment. But adding value around the speed and the security ofa payment provides attractive features to both consumers andbusinesses, and that is something that we continually focus on.Werealise that within the core payments market, regardless of whereyou are operating, the payment looks the same. It is how thatpayment is settled, the systems you use to settle and theinformation reporting around the payment, especially forcorporates by attaching that key invoicing data, that makes thedifference.The ability to provide these services straight-through iswhere the value is.Anyone can make a payment but it is theability to provide a matching service that adds value.

What have been the key growth areas anddrivers for growth in the payments market overthe last decade?The first thing I would point to is the internet.The internet has

Industry Insider: Alan Koenigsberg, vice president and producthead for In-Country and Global ACH TreasuryServices

INDUSTRY INSIDER


Alan Koenigsberg, head of International ACH and In-

Country Treasury Services at JPMorgan Chase, has

relocated to London from New York. As part of his

move, Koenigsberg moved the headquarters for JPMorgan Chase’s

international ACH division to London. He relocated in order to bring to a multi-

country market his experience gained from over 10 years working in US

ACH, the most developed market and one that JPMorgan has led since the

ACH inception in the early 1970s. JPMorgan has identified Europe and Asia

as key growth markets for ACH. The firm will continue to target corporates

and financial institutions. Under Koenigsberg’s leadership, JPMorgan plans to

train companies about the benefits of and how best to utilise ACH globally.

Later this year, he will lead a similar training program for European banks.

provided both consumers and businesses the opportunity to be ableto consolidate and, in some cases, better manage their bill paymentsand their receivables in payments. 10 years ago for example, aconsumer received a paper statement.They would more or less haveto write a cheque, put that cheque in the mail and send it back.

Credit card companies and telecoms companies today all offerrobust bill payment functionality via the web.A consumer canlog on and be presented with their bill, they can authorise amonthly recurring direct debit, or they could can makepayments multiple times throughout a billing period. So it hasoffered the opportunity for, number one: reduced reliance onpaper cheque writing. It has also offered the opportunity forreduced reliance on cash payments, which are typically high riskand high cost.And it has offered consumers and businesses theopportunity to make more frequent payments.

There is an analysis by a major credit card company in the USthat indicated that consumers today make far more paymentsthan they did five years ago. Because of the freedom the internetbrings, they are able to log onto the internet and pay at will.

There has also been an explosion in third party paymentproviders in the market that are offering unique and value addedservices to consumers and businesses, as well to drive additionalelectronic payments.

The advent and the growth of home banking is anotherimportant trend, at least for the consumer segment of the industry.

Could you explain what has driven the growth ofthe accounts receivable cheque conversionmarket?Before I was at JPMorgan I ran payment services for AmericanExpress and I rolled out the first major ARC program in the US.From a corporate perspective, we were one of the most significantlobbyists in the industry to allow cheque conversion, which isvery different from Check 21. It is the ability to take a consumerpaper cheque, convert it to an ACH transaction and settle it onthe ACH rail.There has been absolutely significant growth in thisindustry: from zero payments in 2001 to over a billion by the endof 2004, and it’s continued to grow from there. It is the fastestgrowing ACH standard entry class code ever created.

Why? Consumers don’t actually opt for this; Businesses make adecision to do this with their payments in order to significantlylower their back office processing costs in a couple of differentways. One is it reduces transportation costs – they don’t have totruck cheques around any more, they can process and destroy thecheque within 14 days. It also reduces their cheque clearing costs– cheques cost more to clear than electronic payments do.

In addition to treasury expense savings, the opportunity to reducerisk and fraud losses is also compelling. For example, a majornationwide biller in the US that rolled out cheque conversionexperienced a US$12 million reduction in both operations and risklosses. It is really significant.When you take the cheque out of themix, it means reduced fraud because ACH returns come back muchquicker so that companies can manage the return much faster anddeny service. Essentially this means a five to seven day bump inreduced cycle time, and that is one of the key reasons for adoption.

Could you explain the benefits that Check 21 hasbrought to the industry?First and foremost, Check 21 had been a strong concept in the

industry, but the unfortunate events of 9/11 quickened the pacefor the Congress to pass this bill.There were a number ofreasons for this and one was that when planes don’t fly, chequesdon’t fly. Cheques have a great life because, when you have ahigh value cheque, it flies on a private jet from coast to coast.Check 21 reduces payment system risk in the industry, and theFederal Reserve and Greenspan were completely behind that.

Reduced fraud and reduced cost of transportation have alsobeen benefits. Physical cheques that don’t ride around in truckscan’t be stolen. Once they have been imaged, they can’t be lost.It also provides more straight through processing within thesystem. Check 21 didn’t mandate the use of the image but itallowed the use of a substitute cheque. So banks that can do itare enabled, but banks that can’t accept imaging are gettingpaper – it works in everyone’s favour.

What has been/will be the impact of Check 21on ARC volumes?We never looked at it as a battle between Check 21 and ARCbecause ARC is transitional. It was never meant to be a productthat lasts – at some point, cheque writing in the US will becomemore like a premium service. More and more consumers aremoving from cheques to electronic payments; cheque useage iscurrently dropping between 6-7% a year in the US.As chequewriting falls naturally, customers are moving organically tomechanisms such as ACH.ARC volumes will therefore inevitablygo down because you can’t convert what you don’t receive.

Check 21 is a great companion to ARC because it providesefficiencies in the market and it also provides risk reduction.At acertain point, banks would be foolish to think that ARCvolumes will go up forever.We predict that between 2007 and2008 these volumes will begin to flatten out and then go into asteady state of decline as cheque writing continues to falldramatically in the consumer segment.

On the corporate side, the only negative I could identify wouldbe potential issues with quality.When you begin to truncatecheques from a Check 21 perspective, you must take the physicalcheque out of the mix.The big risk in the industry is that youproduce an image file but you also submit the cheque.There is thedanger of double posting if the process is not managed well. Froma quality perspective, that has to be monitored very closely.

How has the ACH industry combated fraud inspite of the growth in volumes?The ACH industry was created over 30 years ago as acommunity based on trust. If you looked at the types oftransactions that first went through the ACH, they were the safestkinds of transactions: payroll.The second was the insuranceindustry as a huge driver in the ability to collect premiumpayments for insurance policies.As the ACH has grown, we havegrown to other types of payment – bill payments, B2B payments,C2C payments – and as this has grown, fraud has popped up. It isup to every financial institution that uses the ACH in any marketto know their customer and it starts there.You have to knowyour customer and know what the payments are for. Not onlyare you protecting your own financial institution, you areprotecting the network and the entire payment system.

Although fraud has gone up, it is a mere fraction of what it isin the credit card, debit card and cheque industry. I think the


INDUSTRY INSIDER

challenge is now to keep it down as the payments landscapecontinues to change.There are a number of industry bodiesinvolved in working towards this, including the Federal Reserve,Nacha and the Electronic Payments Network.They all workvery closely together in combating fraud.

What can Europe learn from the US market inthe payments arena?Standards. Until things are common and standard, we’re notgoing to get anywhere. I know that we are in an interestingplace right now in Europe as the landscape begins to change,but I apply my thinking to looking at the ACH in the US 20years ago.At that time there were many clearing houses andthere were different states with different rules.As theconsolidation occurred, bilateral agreements came up and todaythere are only two clearing houses in the US. Behind thistransition is that there is one rule book, there is one set ofstandards and there is accountability so that all those banks haveto play nicely together.

I look at the 25 euro states the same way.We’ve got differingneeds, politics and consumer requirements, so it is going totake us working together to find out what these standards areand once they are developed, building towards that criticalmass. It is going to take some time but I know that we’regoing to get there. I’m very confident that every Europeancitizen is going to have the opportunity to make what isknown as a cross-border payment today into a domesticpayment tomorrow.We are in the middle of it at the momentand I think that the work that the EBA, the ECB and the EPCare all doing is overall positive, but I just think that it could goa little bit faster.

I think there are some challenges to SEPA’s 2008 deadline.We’ve already hit 2006 and this change from our perspectiverepresents an even more significant change than that of thecurrency change in 1999. I think that we have to take someaccountability here and get behind some real structured workin order to move this forward. I think overall my tone ispositive but getting there is the challenge, the struggle is thatthe roadmap is not that clear.There is still some confusion inthe industry in terms of what are those rules for Europeandirect debit or for European ACH? Is there enough addendarecord information? You can go on and on, but at some pointwe have got to say ‘OK guys the book is closed, we need tomove on’.We need to move towards critical mass.

Will market forces alone drive consolidation of all of theseACHs? Because if they don’t consolidate, the true benefits to theindustry won’t be there or be as effective.

Conversely, what can the US learn from the restof the world?To move away from paper as fast as it can.The US has had such along love affair with paper and although it is coming down fast,it is not coming down fast enough for business to businesspayments.The only thing that stops a business from going fullyelectronic is a lack of capability and value offered to them.Theycan also learn something from the European corporates andfinancial institutions, as well in terms of offering those types ofbenefits. It may even be further adoption of Swift in the US thatwill provide that catalyst for change.

What was behind the decision to move theheadquarters for JPMorgan’s international ACHdivision from New York to London?From my perspective it was a concern about managing a globalbusiness. I felt we would be more suited to being headquartered inLondon for global mass payments versus in New York.The other isthat when you are in New York, you are not in the global marketand it becomes very US- focused. I’ve always had international staffbut I think there is nothing like being there. It adds credibility toour business as a global bank – we are not just a US dollar bank, weare committed and making significant investments in global marketsfrom a treasury services, core cash management perspective.

Could you explain the work you have beeninvolved in over the last year?I manage both our global mass payments and our in-countrytreasury services businesses in 78 countries around the world, froma high value and a paper perspective.We have been focusing onbeing the world’s global and local provider, building outcapabilities in markets.We are very proud of the fact that weopened our branch in Ho Chi Minh City in Vietnam last year.Wehave continued to expand our ACH offerings around the world –we are currently in 27 countries for payments and 18 countriesfor direct debits.We continue to build value around those masspayment services. On top of that we are also working very closelywith the industry on SEPA, changes in Asia and looking at riskmanagement and regulations that we have to abide by.

What will you be focusing on over the next year?Investments in the new payment landscape in Europe.We arebuilding out a new global operating model for our europrocessing and we are also making some heavy investments inAsia.We are building a web-based Asia receivables application.We are also looking at some opportunities in South America, interms of re-entering some of the markets and enhancing ourservice offering in Mexico, as well as looking at opening upsome additional markets for core cash management.

I think that part of this is a focus on education from a financialinstitution perspective.As you grow new payment channels, youneed to make sure that your clients are educated about how to usethem and also on the changes. Recently we hosted a corporateforum for a number of clients to do just that and we receivedreally good feedback. Education is an important part of what we’regoing to do in the next year as well as investing in our business.

Related to this, what are the key trends in theEuropean and Asian markets that you will bemonitoring over the next year?The cost of compliance continues to go up and it is an issue forall of us.At the end of the day, everyone pays. But it is importantand we need to put in the effort.

INDUSTRY INSIDER


“The cost of compliance continues to

go up and it is an issue for all of us. At

the end of the day, everyone pays.”

Market House, 124 Middlesex Street, London, E1 7HY, UKTel: + 44 (0)20 7522 6042Fax: + 44 (0)20 7522 6100Email: [email protected]

CB.Net Ltd

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SAP UK LimitedClockhouse PlaceBedfont Road, FelthamMiddlesex TW14 8HDUnited KingdomTel: +44(0)870 608 4000Fax: +44(0)870 608 4050www.sap.com/banking

SAP

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BT Radianz

BT Radianz is the leading provider of secure, reliable, and scalable connectivity to the global financial services community. BT Radianz’s shared market infrastructure offers a content- and application-neutralplatform optimized for the time-critical demands unique to financial services. The BT Radianz network con-nects over 10,000 financial sites around the world through a single, redundant, fully-managed connection –while also providing access to more than 150 pre-trade, trade, and post-trade applications from the world'sleading content and service providers, across the straight-through processing (STP) chain. BT Radianz. OneCommunity. One Connection. One Focus.

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TEMENOS is a premier provider of integrated modular and core banking systems to over 300 financial institutionsworldwide. Live in over 500 sites and 100 different countries, TEMENOS software provides banks with a single, real-time view of the client across the enterprise, enabling banks to maximize returns while streamlining costs. Whetherproviding 24/7 functionality to the wholesale, retail and private banking sectors or partnering with central banks oncore system replacement, TEMENOS understands your requirements and knows banking. TEMENOS has 34 officesin 29 countries and is listed on the main segment of the SWX Swiss Exchange.

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or [email protected]

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Documents

Country Focus:Bulgaria - Eurogiro payments April 06.doc.pdf · Country Focus:Bulgaria April 2006. ... some way to achieving this objective. ... Under the terms of the contract,